“It Will Be Quite Ugly” as Fed Ignores Looming $4 Trillion “Big Policy Mistake”

from Zero Hedge

Last week we reported that after some $34 billion in Treasury and MBS maturities on October 31, the Fed’s balance sheet had shrunk the most ever in one month since the start of the Fed’s quantitative tightening, as the Fed’s holdings of Treasurys, MBS and other assets declined to “just” $4.14 trillion, down 7% from their all time highs of $4.5 trillion one year ago.

[…] And it is this decline that is now spooking Wall Street, with a Bloomberg report citing Fixed-income traders who are “telling the Federal Reserve that it might end up making a big policy mistake.”

While most pundits have been concerned about the Fed ongoing rate hikes and resulting tightening in financial conditions, as the Fed’s balance sheet unwind has picked up, “unexpected knock-on effects” have emerged in overnight lending markets such as IOER, Fed Funds and, of course LIBOR –which just hit a new decade high – where demand for short-term cash has been on the rise again after a sharp spike earlier in the year.

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